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Wirehouse ETF Use to Rise 3% Over Next 2 Years: Cerulli

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Use of ETFs by wirehouses will continue to grow over the next two years, with 61% of wirehouse advisors using ETFs through the rep-as-portfolio manager model, and nearly another third using ETFs through the firms’ home-office ETF models, according to recent research by Cerulli Associates.

Despite wirehouses’ increasingly rigorous due diligence process, use of ETFs by wirehouse advisors will further increase ETF asset growth, Cerulli found in its latest report, U.S. Exchange-Traded Fund Markets 2016: Strategies for Broadening Adoption.

“Despite ranking after RIAs in terms of percentage of advisors’ portfolio allocation to ETFs, wirehouse firms hold the largest percentage of ETF assets compared to any other intermediary channel,” Jennifer Muzerall, associate director at Cerulli, noted in a statement. “We anticipate advisor allocation to ETFs to increase, on average, another 3% over the next two years.”

Muzerall adds that growth of fee-based advisory platforms has been a “big driver” of flows into ETFs. “The scale and efficiency these platforms create have brought awareness to many advisors about the fees they are paying for active management.”

Cerulli notes in its reports that discussions with several of the largest wirehouse firms confirms that ETF usage is up and is estimated to grow from a 13.5% advisor allocation to 17% by 2018. The recent growth of fee-based advisory platforms has been a big driver of increased ETF allocations.

Overall advisor ETF usage rate continues on an upward trend, increasing from 11.2% in 2015 to 12.6% through first-quarter 2016, Cerulli notes. Since 2008, advisors’ allocation to ETFs has more than doubled, the Boston-based consulting firm found.

Indeed, recent research by the Money Management Institute found that after years of steady growth, wirehouse alternative investment assets fell about 4% in 2015 from $205 billion to $195 billion with “all of the decline” attributable to a $12 billion drop in liquid alternative mutual funds and ETFs.

For liquid alternatives, the study found, “the obstacles are a lack of investor and advisor education, unrealistic expectations and the rise in popularity of ETFs and other low-cost investment products.”

Cerulli’s research found that more complex investment strategies such as strategic beta and active management are making their way into the ETF wrapper. “Strategic beta is slowly beginning to engulf the ETF universe,” Cerulli says. “While only 21% of overall ETF assets are strategic beta, this number is growing quickly as products begin to develop track records.”

A majority of the asset managers that have recently launched a strategic beta product “have been active managers that are concerned with losing assets to passive products and are therefore using strategic beta as entry strategy to offer ETFs beyond the already saturated purely passive universe,” Cerulli says.

Cerulli also found that ETF sponsors believe “alternatives is one category that has gone underserved — and many advisors agree.” While the idea of liquid alternative ETFs should be enticing to investors, “flows into liquid alternative ETFs have been slow.” Based on Cerulli’s definition, the liquid alternative universe consists of 358 ETFs with $111.5 billion in assets.

Meanwhile, Morningstar reported Monday that flows into commodities spiked again in June, fueled by precious-metals funds, with the majority of flows into gold ETFs.

Fidelity announced in June that it would be lowering fees on 27 of its equity and bond index funds and ETFs in an effort to compete in the new arena where active funds keep bleeding assets and passive funds thrive, Morningstar notes.

“Industrywide data has repeatedly shown that investors are becoming more and more sensitive to cost, and Fidelity has now taken action to reposition itself as a viable competitor to rivals Vanguard and BlackRock/iShares,” Morningstar said.


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